Is the CPF minimum sum of $161,000 enough?

Meeting the CPF Minimum Sum

The CPF Minimum Sum currently stands at S$161,000. It is the figure that the Government believes is needed to deliver an adequate income at retirement.

Only6.5%is saved for retirement

30.5%of your CPF goes into housing/education etc

37%of your salary turns into CPF

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2

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To live comfortably, the median worker would need to have additional savings of $193,315

What is the right way to save?

When should you start saving?

The earlier you start, the better. This is because with cumulative compound interest, you end up with more on the amount you saved. So even if you start with small contributions at a young age, you are able to increase the amount over time. This will help you reach your goal more easily.

To reach the same goal, saving early requires less contribution.Scenario: To save a total of $85,000 by retirement age 65

If you started saving earlier at age 25
Monthly contribution: $100
Total contribution: $49,200

If you started saving later at age 40
Monthly contribution: $197
Total contribution: $61,566

Contribute early - 25 to 65 with $100 per monthContribute later - 40 to 65 with $197 per month

Both receive real investment returns of 2.5% per annum for each year there are funds invested. Source: Schroders. For illustration only.

How regularly should you save?

Regular savings in comparison with lump sum savings can have a significant impact on the eventual size of your savings. Regular investment – called a dollar cost averaging strategy – can reduce the focus on investing at the right time, so you can benefit from staying invested during market lows.

Investing regularly can pave the way for a smoother outcomeThe chart shows how dollar cost averaging would have been beneficial over the last 15 years.

$1,000 invested annually over 15 years$15,000 invested as a lump sum at 2000

Example allocates 100% of investments to the Singapore Straits Times Index (total return). Sources: Bloomberg, Schroders. For illustrative purposes only

Understanding investments

Guarantees still come with risk

Many Singaporeans invest in saving plans coupled with life insurance, that come with a guaranteed return, as they are perceived as “safe” investments. While an insurance policy’s guaranteed rate is fixed, the level of guarantee has been falling together with bond yields (insurance companies invest in bonds to provide guaranteed returns) - see Figure 1.

With low bond yields, the returns may be low and not match the long-term inflation rate of 2%*.

Lower bond yields may result in insurers reducing the guarantees they offer at present, and may make it harder to deliver on past guarantees.

*Source: Bloomberg, as at end of 2015.

Insurance company accepts insurance premiums.

Insurance is not foolproof

Premiums are invested in bond market.

Bond values are falling.

Figure 1: Bond yields have fallen

US 10 yr bondJapan 10 yr bondGerman 10 yr bondSingapore 10 yr bond

Source: Bloomberg, as at 31 May 2016. For illustrative purposes only and does not constitute any recommendations to invest in the above asset class.

A more balanced, risk-controlled way of investing

With guaranteed funds, the risk is losing out on long-term investment returns, which affect the eventual size of your savings. Compare these four investment methods (see Figure 2):

CPF: Unlikely to generate an adequate return to reach the savings level required.

Life Insurance Participating Fund: Unlikely to generate an adequate return to reach the savings level required.

Balanced Fund: Gives the highest potential, however, associated with greater return is a larger degree of uncertainty.

Savers may be wise to separate their retirement savings into two categories:

Guaranteed: offers certainty, albeit limited growth opportunity

Non-guaranteed (through CPFIS, or soon to be launched LRIS, or other private schemes): offers opportunity to generate greater returns

Figure 2: A guaranteed fund will not get savers the additional cash savings needed at point of retirement

CPF Guaranteed Rate

Life Insurer Participating Fund

60/40 Multi-Asset Fund

Singapore Equity Fund

0100,000200,000300,000400,000500,000

Top 25%MedianBottom 25%Bottom 5%Target

CPF guaranteed rate based on aggregate current rate of 4.5% assumed constant for 40 years. Life insurer participating fund based on an allocation of 72% Singapore bonds, 23% Singapore equities and 5% cash. Balanced fund comprises 60% Singapore equities, 40% Singapore bonds. Equity fund comprises 100% in Singapore equities. Salary of S$3,949 per month. Contribution rate of 4.5%. Inflation of 2% p.a. applied to salary. Results shown in today’s dollars in order to compare against target of S$350,000 required in excess of the Minimum Retirement Sum. Source: Schroders. For illustrative purposes only.

The Pre-retirement Phase

In the next paper, we delve into the impact of maintaining growth exposure in the
years before retirement. We also learn the importance of volatility management and
the different ways that this can be achieved to grow your final account size.

RetireSmart 60 seconds series

Our in-house experts
share their insights on
retirement planning.

Lesley-Ann Morgan, Global Head of Defined
Contribution at Schroders, discusses the differences
between Singapore’s CPF system and the UK’s
Defined Contribution (DC) system, and how investors’
needs can be better served with the ability to tailor
their own investments.

Lesley-Ann Morgan, Global Head of Defined Contribution at Schroders, discusses the need to be prepared for retirement and how to generate income upon retirement.

Sangita Chawla, Senior Strategist of Global Defined Contribution at Schroders discusses the importance of flexible saving plans for elderly workers in a time of growing global life expectancy.

Sangita Chawla, Senior Strategist of Global Defined Contribution at Schroders discusses how elderly workers can strike a balance between protecting and growing their wealth to prepare better for retirement.

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